Arizona’s nexus policy for out-of-state sellers
- Oct 17, 2016 | Gail Cole
The Arizona Department of Revenue (AZDOR) has issued a transaction privilege tax ruling that explains when an out-of-state business has a ‘substantial nexus’ with Arizona for the purposes of imposing Arizona’s transaction privilege or use taxes and municipal privilege taxes. In addition, it establishes sourcing rules: how out-of-state businesses should determine the appropriate tax rate. Any out-of-state business with nexus in Arizona must remit both the state TPT and any applicable municipal privilege taxes on taxable transactions.
The new ruling expands the number of activities that trigger substantial nexus and a TPT obligation.
AZDOR considers substantial nexus to exist when a person or business resides in Arizona, maintains an inventory warehouse or place of business in Arizona, or maintains an employee, independent contractor or other business representative or agent in Arizona.
But other situations may also create substantial nexus. As explained by AZDOR, “In all other instances, a case-by-case determination must be made” by answering one “crucial question:” “Whether the activities performed in Arizona for (or on behalf of) a business are significantly associated with the business’s ability to establish and maintain a business market in Arizona.” The answer hinges on the following:
- The type of activity or activities performed in Arizona for or by a business
- The degree of activity (e.g., how often or for how long a certain activity occurs, and what effect an activity or a set of activities has on a business’s market in Arizona)
Type of activity
Nexus creating activities include:
- Having an employee present in Arizona for more than 2 days per year
- Maintaining an inventory of products in Arizona
- Engaging in activities that enable the business to establish or maintain a market in Arizona, including but not limited to soliciting sales, delivering goods sold, making repairs, or resolving customer complaints.
- For affiliated companies and businesses: cross-promoting and advertising, accepting returns or exchanges, fulfilling orders, etc.
Degree of activity
AZDOR considers the following factors when determining if the degree of activity is substantial enough to create nexus:
- The function or purpose of the activity
- The frequency and duration of the activity
- The activity’s connection with or impact on the business’s in-state market
Generally, the more frequently a person or business performs a nexus-creating activity in Arizona, the greater the likelihood that substantial nexus will be created. However, “certain activities will have a more significant impact than others … and by themselves could satisfy the substantial nexus requirement, regardless of whether those activities occur frequently or result in sales or revenue.”
Arizona has five categories sourcing rules:
- General retail sales
- Sales of construction materials to be incorporated or fabricated into a prime contracting project
- Sales of construction materials to be incorporated or fabricated into a non-prime contracting project
- Sales of manufactured buildings
- Leasing or rental activities
The tax rate for general retail sales is based on “where the sales order is received, not where the purchaser resides or maintains a place of business.”
Additional information, including many examples, is available in the ruling (TPR 16-1).
Sales tax automation simplifies transaction tax compliance in all states. Learn more.